Citation for published version (APA): Hai, L. T. D. (2003). The organization of the liberalized rice market in Vietnam. s.n.

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1 University of Groningen The organization of the liberalized rice market in Vietnam Hai, L.T.D. IMPORTANT NOTE: You are advised to consult the publisher's version (publisher's PDF) if you wish to cite from it. Please check the document version below. Document Version Publisher's PDF, also known as Version of record Publication date: 2003 Link to publication in University of Groningen/UMCG research database Citation for published version (APA): Hai, L. T. D. (2003). The organization of the liberalized rice market in Vietnam. s.n. Copyright Other than for strictly personal use, it is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), unless the work is under an open content license (like Creative Commons). Take-down policy If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim. Downloaded from the University of Groningen/UMCG research database (Pure): For technical reasons the number of authors shown on this cover page is limited to 10 maximum. Download date:

2 The Organization of the Liberalized Rice Market in Vietnam Luu Thanh Duc Hai ISBN X

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4 Rijksuniversiteit Groningen The Organization of the Liberalized Rice Market in Vietnam Proefschrift ter verkrijging van het doctoraat in de Economische Wetenschappen aan de Rijksuniversiteit Groningen op gezag van de Rector Magnificus, dr. F. Zwarts, in het openbaar te verdedigen op donderdag 3 juli 2003 om uur door Luu Thanh Duc Hai geboren op 13 september 1964 te An Giang Vietnam

5 Promotor : Prof.dr. ir. C. Schweigman Co-promotor : Dr. C. H. M. Lutz Beoordelingscommissie : Prof. Dr. N. M. Wijnberg Prof. Dr. J. W. Gunning Prof. Dr. H. H. van Ark

6 Preface and Acknowledgements The process of market liberalization in Vietnam over the past 20 years has created a rapid growth in agriculture in general as well as in rice production in particular. The market reform has resulted in drastic changes in the rice market structure, the conduct, and the performance of the major rice production area in the South of Vietnam the Mekong River Delta. The justification for this specific study of the rice market follows primarily from the importance of this product for both domestic and export markets. Rice is the staple food in Vietnam and produced by the majority of the farmers. This study was performed at the Faculty of Economics, the University of Groningen in the Netherlands. I owe much gratitude to many people for their help and friendship during my years in Groningen. Many people contributed to this book in one way or another, and I would like to take the opportunity to mention several of them. First of all, I am greatly indebted to my supervisors Prof. Dr. Caspar Schweigman and Dr. Clemens Lutz who have been of great help to me by giving many valuable and apt comments and advice on the text and the progress of my research. I would like to express my gratitude to all members of the MHO co-operation program, the University of Groningen in the Netherlands and the University of Cantho in Vietnam, which provided me the scholarship. Also, I am indebted to the board and staff members of the Faculty of Economics of the University of Groningen and the School of Economics and Business Administration of the University of Cantho who supported me during the study and research time. I especially thank Madeleine Gardeur, Anita Veltmaat, Gonny Lakerveld, Erik Haarbrink and Wiebe Zijlstra, from the Office for International Relations; Pieter Boele and Arthur de Boer from the Centre for Development Studies for all their help and support. While conducting this study, I also obtained special help from Dr. Kees Praagman from the Department of Econometrics in the University of Groningen; Dr. Nguyen Tri Khiem, Blaine A. Thacker from the University of Cantho. I would like to thank all for what they have done for me. And, I really would like to thank all my colleagues at the School of Economics and Business Administration of Cantho University for helping to cover my duties while I was away. I wish to express my sincere thanks to my parents, Luu Thanh Hai and Ly Thi Dep for their continual encouragement, love, and prayers for my progress and success. Finally I am greatly indebted to my wife, Pham Thi Ngoc Bich and my

7 The Organization of the Liberalized Rice Market in Vietnam lovely daughters: Luu Pham Anh Thi and Luu Pham Anh Thu for all their love, moral support, understanding and great encouragement. Groningen, 25 th May Luu Thanh Duc Hai ii

8 Contents Preface and Acknowledgments Contents List of figures List of tables List of abbreviations i iii vii viii x Chapter 1: Introduction Exploration of the problem Research problem and objectives Limitations of the scope of the study Outline of the thesis 6 Chapter 2: Theoretical Framework and Methodology Basic concepts The market Marketing and agricultural marketing Marketing channels Arbitrage and market integration Marketing intermediaries Marketing functions Industrial organization Markets and industry Structure, conduct, performance approach Competition Institutional economics Theory of institutional economics Transaction cost analysis Research methodology Integration of the SCP approach and the theory of institutional economics Measurement of effectiveness of the marketing system Measurement of efficiency of the marketing system Method of data collection 32

9 The Organization of the Liberalized Rice Market in Vietnam Chapter 3: Vietnam s Rice Market Introduction Overview of Vietnam s rice economy Rice production system The description of the rice growing seasons Irrigated lowland rice and irrigation systems The upland rice production system Production and marketing activities of rice farmers Policy reforms and rice productivity The period before policy reforms (before 1981) Contract system of production The latest reform in Rice market liberalization Trend in rice production The Red River Delta The Mekong River Delta World rice production and trading World rice production, consumption and trade Major rice exporting countries Major rice importing countries 66 Chapter 4: Structure of the Rice Market Introduction Steps in the paddy to rice process Intermediaries involved in rice marketing system Merchants Brokers State farms Facilitators Competition in the Mekong Delta rice market Barriers to entry into the rice market Degree of buyer and seller concentration The assortment of paddy/rice qualities Distribution of market information Rice marketing channels in the Mekong River Delta Marketing channel for rice farmers Marketing channels for different marketing agents Rice marketing channels of State Farms in the Mekong River Delta The process of rice price formation Government policy, regulations and informal trade organizations in the rice market The role of the government Major policy changes to promote rice trading Informal trade organizations Conclusions 103 iv

10 Table of Contents Chapter 5: Rice Trader Conduct in the Market Introduction The characteristics of rice traders Profile of rice traders in the Mekong River Delta Other characteristics of rice traders The buying and selling strategy of rice traders Choice of product Buying and selling strategy Marketing functions performed by rice traders Transportation and storage activity The negotiation process of rice traders Paddy/rice processing Access to information in the market The credit constraints and financial relationships between rice traders Conclusions 135 Chapter 6: Rice Market Performance Analysis Introduction The effectiveness of rice marketing channels Marketing cost and margins analysis Marketing costs of different rice traders Marketing margins analysis An analysis of paddy and rice price patterns Trends in paddy and rice prices The variability of paddy and rice prices Seasonal price fluctuations Market integration analysis The data and model specification Applying the Johansen methodology to test for co-integration: four steps procedure Rice price integration between Vietnam and Thailand Conclusions 167 Chapter 7: The Market Process Introduction The process of competition in the rice market system Changes in market institutions Practical problems in the rice marketing system Conclusions An improved channel format Some recommendations for policy makers 186 References 189 v

11 The Organization of the Liberalized Rice Market in Vietnam Appendices 199 Appendix 4.1 Average monthly turnover of rice traders 199 Appendix 4.2 Processing capacity of some State Owned Enterprises 199 Appendix 4.3 Lorenz Curves and GINI Ratio 200 Appendix 4.4 Computing the GINI ratio of rice wholesalers 201 Appendix 4.5 Computing the GINI ratio of rice millers 203 Appendix 4.6 Relative importance of rice distribution 205 Appendix 5.1 Volume of paddy and rice bought and sold by local assemblers, distance assemblers, and wholesalers 206 Appendix 5.2 Volume of paddy and rice bought by rice millers 206 Appendix 5.3 Volume of rice sold by rice millers and rice retailers 207 Appendix 6.1a Production cost of paddy by different rice crops 208 Appendix 6.1b Drying cost by using drying machines 208 Appendix 6.2 Exchange rate from US Dollar to Vietnamese Dong 209 Appendix 6.3 Selling price of paddy from farmers 210 Appendix 6.4 Selling price of paddy from assemblers 210 Appendix 6.5 Selling price of rice from millers 213 Appendix 6.6 Wholesale price of rice 214 Appendix 6.7 Retail price of rice 215 Appendix 6.8 Computing 12 months moving average of paddy prices 216 Appendix 6.9 Computing the adjusted seasonal index of paddy prices 217 Appendix 6.10 Computing 12 months moving average of retail rice prices 219 Appendix 6.11 Computing the adjusted seasonal index of retail rice prices 221 Appendix 6.12 Vector Auto-regression Estimates 222 Appendix 6.13 Johansen Co-integration Test 224 Appendix 6.14 Vector Error Correction Estimates 225 Appendix 6.15 Results of market integration analysis: the case of Vietnam and Thailand 227 Summary (in English and Dutch) 229 vi

12 List of figures Figure 2.1 Marketing agents in the market 14 Figure 2.2 Economic Institutions 22 Figure 2.3 Dynamic model derived from the Structure-Conduct-Performance approach 26 Figure 3.1 Rice cropping system in the South of Vietnam 40 Figure 3.2 Rice cropping system in the North of Vietnam 40 Figure 3.3 The trend of rice production and rice area in Vietnam, Figure 3.4 From single to double rice cropping in the Mekong River Delta, Figure 4.1 Step in the paddy to rice process 70 Figure 4.2 Lorenz curve of rice wholesalers in the Mekong River Delta 81 Figure 4.3 Lorenz curve of rice millers in the Mekong River Delta 81 Figure 4.4 Distribution channel for paddy in the Mekong River Delta, Vietnam 87 Figure 4.5 Paddy and rice marketing channels in the Mekong River Delta, Vietnam 89 Figure 4.6 Distribution channel for rice in the Mekong River Delta 94 Figure 4.7 Rice marketing channels for export by CODOFARM, Figure 4.8 Rice marketing channels for domestic market by CODOFARM, Figure 5.1 Milling process and the rate of return from paddy to white rice 129 Figure 6.1 Trends in paddy and rice prices in Vietnam, Figure 6.2 Real prices of paddy and rice in Vietnam, Figure 6.3 Coefficient of variation of monthly paddy and rice prices in Vietnam, Figure 6.4 Adjusted seasonal index of paddy and rice prices in Vietnam 155 Figure 6.5 Export rice prices of Vietnam and Thailand Figure 7.1 The improved marketing channels 185

13 The Organization of the Liberalized Rice Market in Vietnam List of tables Table 2.1 Elements of Structure-Conduct-Performance of the market 26 Table 3.1 Vietnam staple food production and food availability Table 3.2 Per capita food grain and rice output by region, Vietnam Table 3.3 Total added irrigated area (construction capacity) Table 3.4 Total irrigated rice area by crop-season, Table 3.5 Percentage of home consumption and marketed surplus of rice farmers in the Mekong River Delta, Vietnam, Table 3.6 Rice production per household and marketed surplus of rice farmers in Vietnam, Table 3.7 Rice production performance, Table 3.8. Milled rice supply, export, and consumption, Table 3.9 Rice production performance, sample farm data, Red River Delta and Mekong River Delta, Vietnam, Table 3.10 Total harvested rice area by traditional and modern varieties of the Mekong Delta and Vietnam 60 Table 3.11 World rice production, consumption, stock and trade, Table 3.12 World rice production, consumption, stock and trade, Table 3.13 Rice exports by region, Table 3.14 Rice imports by region and principal countries, Table 4.1 Barriers to entry for assemblers and wholesalers 76 Table 4.2 Barriers to entry for rice millers and polishers 77 Table 4.3 Barriers to entry for rice retailers 78 Table 4.4 GINI ratio for the market share of surveyed traders, Table 4.5 Four-firm concentration ratio (CR 4 ) of different rice traders in the sample 80 Table 4.6 The standard for classifying rice quality in Vietnam 83 Table 4.7 Types of paddy sold by farmers in the market 84 Table 4.8 Types of rice sold in the retail market 84 Table 4.9 Access to market information 86 Table 4.10 Sources of market information 86 Table 4.11 Distribution of paddy sales by farmers 88 Table 4.12 Distribution of paddy sales by assemblers 90 Table 4.13 Distribution of rice sales by wholesalers/brokers 91 Table 4.14 Distribution of rice sales by millers/polishers 92 Table 4.15 Distribution of rice sales by retailers 93 Table 4.16 List of paddy and rice channels in the Mekong River Delta 95 Table 4.17 Output-price formation 98 Table 4.18 Factors influencing buying and selling prices according to rice millers/polishers 99 Table 4.19 Factors influencing buying and selling prices according to rice assemblers/wholesalers 99 viii

14 Table of Contents Table 4.20 Factors influencing buying and selling prices according to rice retailers 99 Table 5.1 Key personal profile of rice traders 106 Table 5.2 Key commercial profile of rice traders 106 Table 5.3 Other business activities of rice traders 107 Table 5.4 Average marketing investment of rice traders 108 Table 5.5 Purchased & sold volumes of paddy/rice by assemblers/ wholesalers 111 Table 5.6 Average number of suppliers and buyers that the rice assemblers and wholesalers are dealing with each month 111 Table 5.7 Location of wholesaler s buyers and suppliers 112 Table 5.8 Common types of contract used by assemblers and wholesalers 113 Table 5.9 Purchased and sold volumes of paddy/rice by rice millers 114 Table 5.10 Average number of suppliers and buyers that rice millers are dealing with each month 115 Table 5.11 Location of supplier and buyer in the market of rice millers 115 Table 5.12 Common types of contract used by rice millers 116 Table 5.13 Volume of rice sold by rice retailers 117 Table 5.14 Average number of suppliers and buyers that rice retailers are dealing with each month 117 Table 5.15 Location of supplier and buyer in the market of rice retailers 118 Table 5.16 Common types of contract used by rice retailers 118 Table 5.17 Average transportation cost for different rice traders 121 Table 5.18 Main reasons of storage paddy/rice by different rice traders 123 Table 5.19 Information about storage by different rice traders 124 Table Main issues that assemblers and wholesalers pay attention to when they perform their business negotiation 125 Table Main issues that rice millers pay attention to when they perform their business negotiation 126 Table 5.22 Main issues that rice retailers pay attention to when they perform their business negotiation 127 Table 5.23 General information on the surveyed rice millers 128 Table 5.24 The impact of different processing machines on the conversion ratio, The case of Meko-Food Cantho, Vietnam, Table 5.25 Sources of funds for rice traders 131 Table 5.26 Amounts borrowed by rice traders 132 Table 5.27 Condition for borrowing 133 Table 5.28 Information on financial relationships between rice traders 134 Table 6.1 Major rice characteristics to be preferred by rice consumers in Cantho 138 Table 6.2 Major rice varieties marketed by rice retailers in Cantho 139 Table 6.3 Average marketing cost of rice assemblers in the MKD 142 Table 6.4 Average marketing cost of rice wholesalers in the MKD 143 Table 6.5 Average marketing cost of rice retailers in the Mekong River Delta 144 Table 6.6 Average processing cost of rice millers in the Mekong River Delta 145 ix

15 The Organization of the Liberalized Rice Market in Vietnam Table 6.7 Marketing costs and gross margins of Farmers, Assemblers, Millers, Wholesalers and Retailers in the Mekong River Delta, Table 6.8 Total Profit margins of different rice traders in the Mekong River Delta, Table 6.9 Paddy and rice prices in Vietnam, Table 6.10 Coefficient of variation of monthly farm gate paddy and retail prices by year in Vietnam, Table 6.11 Unit root test on rice price series in different market places 160 Table 6.12 VAR analysis on rice price series in different market places 161 Table 6.13 The λ trace and λ max tests 162 Table 6.14 Estimate the dynamics in the short-run by using VECM 164 Table 6.15 Estimate the dynamics in the short-run between Vietnam and Thai s price (Co-integration restrictions) 166 List of abbreviations CLRRI: CPI: CTV: ECM: IRRI: MKD: RRD: SCP: SEBA: SOEs: TCA: UNDP: USDA: VAR: VAT: VFA: Cuulong Rice Research Institute Consumer Price Index University of Cantho Error Correction Model International Rice Research Institute Mekong River Delta Red River Delta Structure Conduct Performance School of Economics and Business Administration State Owned Enterprises Transaction Cost Analysis United Nation Development Program United State Department of Agriculture Vector Auto-regressive Model Value Added Tax Vietnamese Food Association x